SEC Proposes to Rescind Adviser 'Pay-to-Play' Rule
The proposal would replace the current strict-liability ban on political contributions with a principles-based approach under existing antifraud provisions.
The SEC has proposed rescinding Rule 206(4)-5, its "pay-to-play" rule for investment advisers, which currently imposes a two-year timeout on providing compensated advisory services to a government entity after a covered employee makes a political contribution. The proposed change would replace the prescriptive, strict-liability regime with a principles-based approach, relying on the Investment Advisers Act's general antifraud provisions and an adviser's fiduciary duty to prevent quid pro quo corruption.
Sophisticated counsel care because the current rule's strict application has created significant compliance burdens, hiring obstacles, and business disruptions, sometimes triggered by inadvertent or small-dollar contributions. While a principles-based standard offers more flexibility, it also requires advisers to design, implement, and defend bespoke compliance policies to manage these risks. The SEC noted that other pay-to-play rules for broker-dealers and municipal advisers would remain in effect.
The proposal is open for public comment, and the SEC is also considering amendments short of full rescission, such as raising contribution thresholds or shortening the timeout period. The existing rule remains in effect pending further SEC action.